BlackBerry: Appraising Its Full-Year Guidance And Its Valuation (NYSE:BB)


Investment Thesis

BlackBerry (BB) delivered strong Q2 2021 results. But as we look ahead towards the rest of its fiscal year, it’s difficult to get overly excited while paying more than 2x next year’s sales.

Revenue Growth Rates Will Finish the Year Negative

Source: author’s calculations, GAAP revenues, **fiscal 2021 guidance taken from the earnings call

BlackBerry has been through an unstable time this past year. Meanwhile, looking ahead, there appears to be little relief for shareholders as its full-year fiscal 2021 guidance is likely to hover around negative 7% y/y.

This is a rough estimate on my part, given that CEO John Chen alludes to BlackBerry’s full-year revenues being around $950 million – hence, I’ve allowed for some conservative guidance from BlackBerry, assuming that full-year revenues would reach $965 million.

Given that we know that Q1 2021 was challenging but now firmly in the rearview, that quarter’s performance alone would not be enough to drag down BlackBerry’s full-year revenues to reach negative 7%.

This implies that some of BlackBerry’s quarters for the remainder of the year should also be turning in negative revenue growth rates.

For their part, Wall Street analysts are expecting Q3 2021 to be even worse than Q1 2021 (a period when the economy went into lockdown):

Source: SA Premium Tools

From my perspective, I believe this expectation might be overly bearish, even if it is pointing in the correct direction.

So, if revenues are struggling to gain traction, what should bulls keep in mind?

Bull Thesis: Long-Term Prospects, Strong Recurring Revenues

Source: Q2 2021 Investor Presentation

BlackBerry set out its long-term timeless goal to reach 90% recurring revenues from its software products. On the surface, this appears an impressive goal.

However, looking through BlackBerry’s SEC filings and a different perspective becomes evident:

Source: Q2 2021 10-Q SEC filing

Highlighted above we can see that during fiscal 2020 (last fiscal year), BlackBerry’s recurring revenues were already greater than 90%. This implies that BlackBerry’s long-term goals are lower than its performance last year.

Source: Q2 2021 Investor Presentation

Further dissecting its revenues, we can see that BlackBerry’s Software and Services segment accounts for approximately 60% of BlackBerry’s total revenues.

Source: author’s calculations; Q2 2021 Press Statements

Hence, given that 90% of this segment’s revenue is from recurring sources, this translates into approximately $486 million of recurring sources. Seeing that BlackBerry’s market cap is $2.5 billion, having very close to $0.5 billion from recurring sources, particularly in the present market where investors are craving from SaaS-like businesses, this is very attractive.

However, aside from having a recurring source of revenues, investors also demand high growth from these businesses, and on this front, BlackBerry struggles to satisfy.

Moving on, Q2 2021 (most recent quarter) was a strong period for BlackBerry’s Licensing segment, which saw its revenues jump 86% y/y to $108 million.

Once again, if we compare BlackBerry’s Q2 2021 performance with its full-year guidance for this segment to reach modestly above $250 million in fiscal 2021, we are left with unappetizing prospects.

To illustrate, during H1 2021, BlackBerry’s Licensing segment reached $166 million. According to BlackBerry’s own guidance, assuming it reaches approximately $260 million for its full year 2021, this implies that H2 2021 would bring in close to $94 million.

If BlackBerry’s Licensing is $94 million or thereabouts over a 6-month period, this not only implies a rapid deceleration from Q2 2021, but it actually means that its Licensing revenues would be less than the $58 million it generated during its turbulent Q1 2021 period.

Valuation – Not Attractive Enough

It’s difficult to build a compelling reason to remain long BlackBerry at present.

On the one hand, BlackBerry’s growth rates continue to generally meander towards the negative, even if along the way it has the odd positive quarter, as we just witnessed in Q2 2021.

Furthermore, its cash flows are not looking all that enticing, particularly as we think of a mature company’s cash flow profile. In fact, during its trailing six months, BlackBerry’s cash flows from operations were simply at breakeven.

Having said that, breakeven is a marked improvement from the negative $47 million BlackBerry reported during H1 2021.

Assuming that BlackBerry’s next fiscal year, fiscal 2022, were to improve from this year’s results, and its top line was to reach $1.1 billion, investors are already being asked to pay a 2x multiple to next year’s sales. For a company with no consistent growth, this is still too big a multiple.

The Bottom Line

BlackBerry just reported a very strong quarter, but as we look ahead towards the remainder of its fiscal year, it appears that this recent quarter’s performance was a flash in the pan and that the rest of its fiscal year is expected to deliver shareholders with negative results.

Meanwhile, I contend that its valuation still remains elevated for what BlackBerry offers investors.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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